WhiteHorse Finance, Inc. 7.875% Notes due 2028 Q3 FY2024 earnings call

Key Points

• Q3 results were disappointing due to investment portfolio decline from net realized and unrealized losses.
• Portfolio activity: gross capital deployments of $51 million, with seven new originations totaling $49 million and $2 million for add-ons to existing investments.
• STRS JV: transferred three new deals and one add-on in Q3, with an aggregate fair value of $309.8 million.
• Write-downs: $6.6 million on American Crafts, $5 million on Honors Holdings, and $0.9 million on Telestream.
• Lending market: sponsor segments aggressive with thin deal flow; non-sponsor market more attractive with leverage 3-4.5 times and pricing SOFR 600-800.
• Fourth quarter volume likely modest; repayments expected high; pipeline at ~185 deals.
• Distributions: Q4 dividend 38.5 cents per share, special distribution 24.5 cents per share, spillback income estimated at $26.8 million.

In the third quarter of 2024, WhiteHorse Finance's GAAP net investment income and core NII was $9.2 million or 39.4 cents per share, slightly below Q2's $9.3 million or 40 cents per share. Q3 fee income was approximately $0.3 million, lower than Q2's $0.4 million. NAV per share at the end of Q3 was $12.77, a 5.1% decrease from the prior quarter. Gross capital deployments were $51 million, partially offset by total repayments and sales of $30.2 million, resulting in net deployments of $20.8 million. The STRS JV had an aggregate fair value of $309.8 million at the end of Q3 with an average unlevered yield of 11.7% and leverage of 0.97 times. The portfolio mix was approximately 63% sponsor and 37% non-sponsor, with 99% of the debt portfolio being first lien.

Forward-Looking Statements

• Fourth quarter volume likely to be modest compared to other fourth quarters.
• Repayments expected to remain high for the balance of 2024 and into 2025.
• BDC balance sheet has approximately $45 million of capacity for new assets, and the JV has approximately $90 million of capacity.
• Pipeline has ~185 deals, including seven new mandates and four add-ons to existing deals.

Risks

• Investment portfolio markdowns impacting NAV, such as $15.9 million net markdowns in the portfolio.
• Challenges with troubled accounts: American Crafts loss of major customer, Honors Holdings in challenging industry conditions, and Telestream placed on non-accrual.
• Aggressive lending market conditions leading to thin deal flow, high leverage on credits with cyclicality, and uncertainty around interest rate movements and government policies affecting inflation.

Q: Follow up on deal environment, specifically if we should think about modest portfolio deleveraging over the next few quarters?

A: Stuart Aronson says based on mandates, not seeing leverage getting lower, but there's undeployed capacity on BDC and JV balance sheets.

Q: Thoughts on PIK income in new deals and its impact?

A: Stuart Aronson states new deals generally seek mostly cash income, with PIKs in troubled accounts where collection is in doubt.

Q: Reason for exiting American Crafts instead of working it out further?

A: Stuart Aronson says loss of major customer took revenue base too low for real recovery, so exploring sale to strategic players.

Q: What does redoubling on non-sponsor effort mean?

A: Stuart Aronson explains more focus on non-sponsor due to less competition, with regular dialogue with originators to develop non-sponsor opportunities.

Q: Thoughts on yield compression for the quarter?

A: Stuart Aronson says it's a combination of lower base rates and lower spreads, with call protection rolling off affecting repricing of deals